In summary, the core issues identified by the Russell McVeagh survey are:
- bespoke contract amendments (special conditions) not always read and understood by the parties
- owner/contractor variations (and quality of design) leading to delays
- slow pace of construction
- cost and delays in the consent process
- late provision of owner information
- engineer decisions
- finance/insolvency
The solutions identified in the survey results were varied:
- clarity (and standardisation) of contract documents
- quality of design information
- personal relationships between the parties
- high quality and prompt information from the contractor
- project manager
- engineer to the contract
- contractual dispute resolution processes
- disputes boards
While the Government, at all levels including local government and government bodies (crown entities and council controlled companies), rightly must take some blame for the risk allocations they have adopted and the way in which they administer contracts, credit must also be given for the way in which the Government has accepted responsibility for the problem. Public sector procurement represents the majority of infrastructure spending, and most recently in housing initiatives.
Speaking at the Infrastructure NZ symposium last Friday, Infrastructure Minister Shane Jones announced the establishment of a new "infrastructure agency" in order to "improve planning and investment." Quite what this actually means is not entirely clear. The agency is not to be formally established until later 2019, by which time hopefully Cabinet will have a clearer idea of the problems, and sensible ways in which to address them
My own view is that a lot can be learned from the UK's 1994 Latham report, Constructing the Team, and the 2005 Australian Blake Waldron Report, Pressure Points in the Australian Construction Industry, each of which comes to striking similar conclusions as the Russell McVeagh survey.
My pick of the top five proposals for improving performance in the construction industry are:
- Spend time at the start of the project understanding the project risks and reducing uncertainty - this is typically categorised as "Early Contractor Involvement", which militates against the traditional incomplete tender package which requires contractors to submit fixed, and unrealistic, prices.
- Adopt an appropriate allocation of risk for the project - contractors must be able to either avoid, mitigate or price for risks. If not, then it is properly a risk which must remain with and be paid for by the owner.
- Adopt a form of contract appropriate for the project - while the responses to the survey show an overwhelming attachment to NZS3910, there are alternatives which should be considered on a project by project basis. Risk is, typically, project specific. The NEC suite of contracts has a more balanced approach to risk, and it's suite covers every aspect of construction in a consistent fashion. It's challenge is the language it adopts; having to read and understand a contract prior to signing might be a good thing.
- Amend the Construction Contracts Act 2002 to make owners (and as a consequence their financiers) responsible for the payment of subcontractors. Subcontractors carry out most of the work in construction projects, and they tend to carry a disproportionate amount of the risk. The Mainzeal failure established not that misuse of retentions were the issue, but that cashflow for projects were being diverted to more pressing demands, leaving subcontractors out of pocket. If owners could be forced to pay subcontractors, they would take greater care to ensure that payments they make were applied to cashflow for the project. Cashflow is not a fund for the contractor to use at its whim - it includes moneys properly due to those actually carrying out the work.
- Early identification of disagreements, and promptly referring them to adjudication or to a properly independent neutral or a disputes board for interim determination. Currently, parties and lawyers treat adjudication as part of the formal disputes process, rather than as a means of dealing with disagreement in a way which enables the project to continue. Contractors are overly concerned about relationship damage resulting from adjudication and owners tend to treat adjudication as a litigation process, with all the costs and documentation that entails. This is not the best use of the process.
We are currently at a point where there is an opportunity, and a will, to make significant structural changes in the industry. We just need to look widely enough and be brave enough to move away from a standard approach which has come to serve us all so poorly.